South Korea Watches A Conglomerate Fold

FOR years, South Korea's rapid growth has been marked by protection and government assistance for the family-owned conglomerates known as chaebols that drive the economy. But chaebols can expect more independence - and vulnerability - in the future.

The government may be breaking its habit of bailing them out.

Woosung, Korea's 18th-largest construction company and 28th-biggest conglomerate, was allowed to collapse in late January.

''Backward practices and systems must be cleared away,'' Rha Woong-bae, a top official in Korea's finance ministry said afterward. The speech was intended to inspire a little trepidation in corporate ranks.

Large corporate groups have long been considered ''too big to fail.'' The government has not wished to see bankruptcies that could threaten business confidence, cause unemployment, and kill a source of campaign funding. Smaller companies that make bad decisions usually are not spared, however.

The Korean government hasn't let one of the nation's top 30 companies fail since 1985, when Kukje was dismantled. That act was initiated by technocrats warning chaebols to reform, but was tinged with politics because the company had not made political contributions.

It is unclear how much things have changed in an economy still dominated by large conglomerates such as Hyundai, Samsung, and Daewoo.

The Korean press calls it a ''U-turn'' in policy.

Steve Marvin, an analyst at Ssangyong Securities in Seoul, characterizes it as more of ''an evolution than a revolution.'' Yet, in a country that came from war and poverty to the first world in one generation, things can evolve fast. As recent as 1989, the government pumped billions of won into the ailing Daewoo Shipbuilding.

The construction business that Woosung was in faces a particular problem: Everyone wants to live in Seoul. But with land scarce, construction firms eager to expand looked to the countryside. Banks went along, resulting in a rural apartment glut.

Behind the particulars, this case illustrates a common pattern of recent years.

Banks, on orders from a government that often dictates which fields businesses should enter, have issued credit to favored businesses. Highly leveraged companies expanded their range of activities and market share at a financially precarious pace. Rather than focus on what they were skilled at, octopus-like firms pushed arms into crannies they shouldn't have explored. Businessmen who preferred expansion to profits built grand and fragile firms. It was not uncommon to have 9 parts debt for 1 part equity.

Now that the threat of bankruptcy is more real, analysts say, fewer excessive investments will be made. Companies will be better managed, carry less debt, and perhaps even specialize.

Asian nations often have emphasized producers' more than consumers' well-being. But with Korea's heavily protected market opening, exposing businesses here to global competition, the trend appears to be swinging the other way.